Cryptocurrency risks and how to manage them
Crypto and risk never seem too far separated in the crypto conversation. There’s the intimidating risk disclaimers. The media stories. The sheer overwhelm of getting to grips with a new and unfamiliar technology. All of which may leave you asking: is crypto too risky an investment for me?
In this article, let’s break down:
Types of crypto risk
All investments come with their own degree of risk. In this top-level review, let’s keep it simple and take a closer look at five simple categories of risk that are relevant in the crypto context.
Crypto is different from other types of financial investment in the way it works and the way it is stored. Private keys. Backup phrases. Wallet addresses. Whether you choose to store your crypto with a trusted custodian (a ‘custodial’ solution) or safeguard it yourself (‘non-custodial’), you will be exposed to some level of storage risk – the risk that the crypto you own may be hacked, stolen, or lost.
How do you mitigate that risk? By understanding how the technology operates, how the different storage options work – and, preferably, diversifying your risk among different solutions.
Closely linked to the question of storage, one of the biggest decisions you’ll make in the management of your crypto portfolio is your choice of custodial or non-custodial solutions (more information about the differences between these and which might be best suited to you in an upcoming guide).
If you choose a custodial solution – putting your crypto under the care of a third-party provider such as a cryptocurrency exchange or other service provider – you expose yourself to counterparty risk in the process. That’s to say, the risk that the crypto you hand over to a third-party is not returned to you when you want it due to the insolvency or bad action of the custodian platform. Sadly, there have been multiple high-profile instances of such cases in the crypto sector. And while regulation is rapidly evolving, there is currently no comprehensive framework in place to protect any deposits you hand over to a third party. Only ever entrust your crypto to platforms you explicitly trust to safeguard your money on your behalf, and spread that risk across platforms and solutions.
Of course, this does not mean that the alternative ‘non-custodial’ solution – where you safeguard your funds yourself – is without any risk. In this case, the key difference is that the risk is squarely on you – rather than a third party – to ensure best security practice. Your money is as safe as the measures you individually take to protect it – which, depending on your preferences and knowledge level, could be an advantage or disadvantage. For more practical tips, take a look at our security guide.
Scams are a bane of online activity and, unfortunately, crypto can be a prime target, whether it’s on social media, via fake competitions and giveaways, or account impersonation. Staying safe requires constant vigilance, a healthy dose of scepticism and mindfulness of the familiar saying ‘If it’s too good to be true…’
We’ve put together a short guide on staying safe from scammers in our blog piece here.
Likely a familiar one to you, cryptocurrency is of course famous for the rollercoaster nature of its price action and the ups and downs of its investment cycles.
Risk and reward are of course two sides of the same coin, and crypto has undoubtedly delivered some of the biggest gains – and biggest losses – of the last decade.
Common sense financial rules apply here – be aware of the risk, know your timeline and investment strategy, only invest what you can afford to lose. Even within crypto, the level of risk is not uniform – fairly evidently, you will take more risk in investing in an almost unknown coin than restricting yourself to more ‘established’ cryptocurrencies such as Bitcoin or Ethereum. Do your homework and have your own plan of action.
Lack of knowledge risk
Tying it all together, the best piece of advice you could probably get is to know and understand as much as possible about what it is you are investing in, how you plan to do it and the nature of the environment you’re operating in. Information, knowledge and awareness really are the best defence. Conversely, not knowing or understanding anything about what you are investing in or the products you are using is one of the greatest risks and easiest ways to run into difficulties.
While we can’t offer you any financial or investment advice, what we can do is provide information as transparently as possible to help you get your bearings and make your own decisions.
Take a look around the Zumo blog and you’ll find an ever-growing range of beginner-friendly perspectives on stuff you need to know to take your first steps in crypto – from 101 primers on basic concepts such as crypto or blockchain, to overviews of key building blocks such as Bitcoin, Ethereum, decentralised finance or NFTs.
Getting into crypto means you have to be comfortable with it. Hopefully this short guide has given you a first overview of some of the risk factors you need to take into account, and signposted where you can access further information to help you with your decision-making.
If you’re ready to move on to the next step, we’ve prepared a short checklist of questions you can ask yourself to find out if crypto is right for you. And of course, if you’d like to see how it all works for yourself with an easy-to-use app, you can download the Zumo app anytime via the Google Play or Apple App Store.